A yield in the region of 5% and the confidence to detail five-year financial plans. Buy, sell or hold?
Full-year results to 31 March
- Underlying or adjusted operating profit down 5% to £3.28 billion
- Underlying earnings per share down 7% to 54.2p
- Final dividend of 32.16 pence per share
- Total dividend for the year up 1.2% to 49.16p per share
- Net debt of £28.55 billion
Chief executive John Pettigrew said:
"In the past year we have successfully navigated the challenges of Covid-19, delivered over £5 billion of capital investment and achieved a solid underlying financial performance. This is testament to the strength and resilience of our business model and the unwavering commitment of our employees.
"We also announced the transformational acquisition of WPD which will ensure National Grid is at the heart of the energy transition in the UK and enhance the future growth profile of the Group. National Grid has an exciting future, with numerous opportunities in the UK and US to provide energy security and support the delivery of net zero.
"Our confidence in the Group's prospects is reflected in the ambitious five-year outlook for capital investment, asset growth and earnings, which we are announcing today."
UK and US energy company National Grid (LSE:NG.) reported better-than-expected adjusted earnings in for a year affected by lower commercial consumption because of the pandemic. And, for the first-time, it detailed estimates for the next five years of trading.
The group, which over the year announced a reshuffle of its business assets, also declared a final dividend of 32.16p per share, making for a 1.2% increase over the year to a total 49.16p per share - in line with its inflation linked policy.
National Grid shares rose marginally in UK trading, having gained by more than 15% since pandemic induced lows in March 2020. Shares of Scotland headquartered SSE (LSE:SSE) are up by around 40% over the same time, while British Gas brand owner Centrica (LSE:CNA) is up by around a third.
Adjusted earnings per share of 54p beat analyst forecasts of nearer to 52p per share, driven by outperformances at both its UK electricity and UK gas transmission businesses. Earnings in the US came in marginally below forecast.
Management guidance for the five-year period to the financial year 2025/2026 pointed to total cumulative capital expenditure of between £30 billion and £35 billion. Adjusted earnings for the period are expected to grow at a compound annual growth rate of between 5% and 7%.
Following previous investments, National Grid is now partnering German utility RWE to develop offshore wind farms in the USA. Earlier in the year it agreed to buy Western Power Distribution (WPD), the biggest UK electricity distribution business, for £7.8 billion to focus on electricity, while selling a majority stake in its UK gas transmission business.
Employing over 22,000 people, National Grid operates around 4,400 miles of overhead electricity lines and 1,400 miles of underground cables. Its UK high pressure gas network runs to over 4,700 miles. Similarly in the US, it has over 9,000 miles of electricity cabling and more than 35,000 miles of gas pipelines.
Looking forward, it expects to invest up to £35 billion across its energy networks and adjacent businesses, in both the UK and US. Around £8 billion is expected to be directed to the UK and around £17 billion towards the US during the next five years. Net debt is expected to increase by around £3 billion from £28.6 billion at the end of March 2021 to help fund continued growth in the business.
For investors, Covid has crimped performance and cannot be dismissed. Negotiations with UK and US regulators are a mainstay and regularly offer uncertainty, while a recent switch in the measure of inflation used in relation to its dividend payment has effectively reduced the rate of growth. That said, climate change and clean energy has become central within management’s strategy. A target of 90% of electricity imported by its electricity interconnectors will be from zero carbon sources by 2030, and few companies are able to offer five-year financial plans. For now, and with a historic and estimated dividend yield in the region of 5% still highly attractive in today’s ultra-low interest rate era, income investors are likely to remain steadfast in their support.
- Attractive dividend payment (not guaranteed)
- Five-year financial plans outlined
- Covid-19 raised costs and reduced consumption
- Net debt expected to rise by £3 billion from £28.55 billion
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